APPRAISALS: How to prepare for one, what do appraisers look for, and what happens if an appraisal comes in too low?
If you are purchasing a home and financing it with a mortgage, the bank will require an appraisal of the property to determine its market value. The dollar amount the bank will lend you is based on the appraised value of the house rather than the agreed upon purchase price between the buyer and the seller.
How do you prepare for a home appraisal?
In an appraisal, a licensed appraiser will determine the value of your home by evaluating the condition of your home against comparables (typically 3) of other recently sold properties in your area. Square footage; number of bedrooms and bathrooms; and upgrades to a home, among other factors, are included in an appraiser’s analysis to come up with the property value.
As a seller, below are a few steps you can do to prepare for an appraisal, putting your home in its best light to attain the highest value possible.
Manage First Impressions
The appraiser isn’t coming by to judge the cleanliness of your home, but it’s still a good idea to tidy up beforehand to show your home at its finest and to make a good first impression.
You should attend to both the inside and outside of your home. For the exterior, we recommend that you mow the lawn, trim the bushes, sweep sidewalks/porches, and put away tools/gardening equipment. When it comes to the interior, clean your home as if you were expecting guests to come over. You don’t want mess and clutter to portray a negative image of your home. Bottom line: you want the appraiser to have an overall impression that your property is in really good condition, inside and out.
In addition, it is worth keeping in mind the little things that can make an appraiser’s visit a pleasant one. If it’s cold outside, make sure you have your house set at a comfortably warm temperature, and vice versa if it’s hot outside. And, if you have a dog or other pet, try to keep them out of the way when the appraiser is there. The appraiser doesn’t want an excited or angered pet jumping up on him/her while they are working.
Tackle Minor Repairs
If your home is in need of some minor repairs, that could hurt your appraisal value. In addition, having lights or fixtures that don’t work can make your home seem older than it actually is. We recommend fixing or replacing broken door latches and handles and basic plumbing/light fixtures; damaged gutters; and peeling paint. If the appraiser looks around and there are no simple repairs needed, they are more likely to assume that larger items and systems are maintained as well.
Prep a Home Improvement List
We advise our clients to put together a list of improvements that have been made to their home in the past several years along with associated costs. If you have kept the invoices for these upgrades, that is even better and can be provided as back-up material. Upgrades could include a new central air system, updated appliances, new flooring, a room addition, or a new roof.
Cost does not necessarily equal value so whatever was spent may not translate to a dollar for dollar value increase. But, it’s good information for the appraiser to have when comparing your home to others in the area.
Sell the Neighborhood
You should also keep track of any changes or amenities in your neighborhood, including parks, playgrounds or historic landmarks that make your area stand out as a great place to live. This also includes noting which school district your home is in, especially if your neighborhood is on the border with another school district where homes sell for less. For example, homes in Potomac, MD feed into three different high schools and similar houses can sell for $50,000 - $100,000 more or less depending on the neighborhood and school district. Therefore, you want to make sure that the appraiser is using comparables of homes that feed into the same school district as yours. Your Realtor can help with this by providing the appraiser with a suggested set of comparables that most closely matches the value of your home.
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What do you do if an appraisal comes in low?
In most cases, homes are appraised using the sales comparison approach, where the appraiser compares the property to similar houses on the street or in the subdivision. The house you are buying may come in at a higher or lower value depending on its comparable age, square footage, physical attributes, and the number of bedrooms and bathrooms.
Since today’s buyers and sellers are savvier and more informed about a home’s “going price,” houses are much less likely to fall below their appraisal price than in years past. However, fair market values can shift, potentially adjusting your appraisal by thousands. If this happens to you, consider the following options:
Renegotiate the Deal with the Seller
You can ask the seller to drop the purchase price to the appraised value. The seller may be willing to do this if the property was on the market for several months. If they do not lower the price, the seller risks losing you as a buyer. They will have to incur the trouble of putting their property back on the market again and it make take some time for them to receive another offer. Additionally, the next buyer may incur the same problem with the appraisal. Unless the home is in a highly desirable and competitive area, you will have the advantage in negotiations with the seller.
Make Up the Difference
If you have the financial means, you can make up the difference between the purchase price and the appraised value by putting extra cash down. If there were multiple offers on the house, another buyer may be willing to pay above the appraisal value, so the seller may be less likely to negotiate with you. If this is the house of your dreams and will be your “forever” home, you may want to pursue this option.
Split the Difference
The seller and buyer can split the difference. The seller can reduce the purchase price by a certain amount and the buyer make up the difference by bringing cash to the table. If the seller has shown good faith in the transaction, for instance, by being fair and reasonable in responding to repairs requested as a result of the home inspection, you may want to go this route. In my experience, this is the most common solution when there is a difference between the purchase price and appraisal value.
Request a Second Appraisal
Either the buyer or seller can request a second appraisal. If the sellers were surprised by the home’s lower-than expected appraisal value, they may opt to pay for the second appraisal, which will still be ordered by the buyer’s lender. If there were attributes of the home that were overlooked or if recent comps in the immediate area were not included in the original appraisal, this should be pointed out to the second appraiser. The second appraisal could come in higher if the first appraiser was inexperienced or was from out the area.
If you are using a conventional loan for your financing, then it is subject to the rules of the Home Valuation Code of Conduct (HVCC). If the appraiser identified by the bank is not familiar with the local area, the buyer can contact the lender, preferably in writing, and request that a local appraiser be used.
Cancel the Transaction
Most purchase agreements that contain financing include loan and appraisal contingencies. If the appraisal comes in low and all else fails, a buyer can cancel the transaction and receive back their earnest money deposit. However, buyers should be aware of contingency deadlines. For instance, a 10-day appraisal deadline means that the appraisal must be performed within 10 days after the contract ratification date. If the deadline is missed, then the contingency is no longer in effect.
Determining how to respond to a low appraisal takes experience. I recommend always discussing your options with your real estate agent to determine the best course of action.
Real World Example from Eric Stewart
"We priced a fantastic home at $800,000, despite my feeling that the value of the home was $838,000. We took a different approach with this home by pricing it lower than the value I saw. When we placed the home on the market on Thursday, by Tuesday we had buyers willing to pay $825-$830 thousand. With two buyers so close, we ask them for their best and final offers without telling them what the other has offered. One buyer actually went up to $880,000! What a dream come true! It turned out to be a really great sale and a really great buyer.
I told my clients, though, that we weren’t out of the woods yet. We still had to go through the appraisal, and we knew it would be hard to get the appraisal to come in at the full sales price these buyers were willing to pay, $880,000. Though I wanted to, I couldn’t drive the contingency out of the contract, but I did my best to show the appraiser the value in the home. I met the appraiser. I wanted to be there while he was inspecting the home so that I could point out all of the value he might have missed. You hear me often quote Warren Buffett - “the price is what you pay, the value is what you get.” If you pay the price, even if it’s a high price, and the value is there, you’re not overpaying. This is my job as a listing agent - to sell the value that’s there to the best of my ability.
When the day of the appraisal come, I met the appraiser at the house. Turns out it was a gentleman who went to the same high school as me! We were a couple years different. It was nice to go to into the appraisal with some sort of camaraderie. I had a tough time finding comparables literally in the neighborhood for this home. I got my best comps a half a mile out of the neighborhood and gave them to the appraiser, and he came back and said that he appraised the home at $830,000.
Now the sellers didn’t want to go down to $830,000, and the buyers now didn’t want to go up to $880,000, but remember, I still had this other buyer who wanted the home. They were still contacting me, telling me “if anything falls through, I want to know about it..” and I was sure they’d go up. I used this competitive threat to negotiate the buyer up to $855,000 - halfway between the appraisal given and the agreed to sale price!
It was still a very, very good sale; my sellers were still extremely happy with the sale price of their home. The buyers got an amazing property and are the winners here, because they get to put their name on that mailbox."
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About Eric Stewart
Eric Stewart started his real estate career in 1987 and each year he and his group sell over 150 homes in DC, Maryland, and Virginia. The Eric Stewart Group has completed more than 3,000 real estate transactions, placing Eric in the top 1% of Realtors® in the nation. With a comprehensive approach to marketing and a knack for negotiation, the Eric Stewart Group has built a reputation of trust and tireless persistence throughout the area.